This page intentionally left blank Minority Shareholders’ Remedies A J Boyle assesses the current state of English company law on minority shareholders’ remedies from historical, theoretical and comparative perspectives in this important new addition to Cambridge Studies in Corporate Law He analyses the reforms of the UK Law Commission, which have been further appraised and amplified by the work in progress of the Company Law Review Steering Group The book covers the common law actions by exception to the rule in Foss v Harbottle, and the statutory remedies by way of petition for unfair prejudice and /or just and equitable winding up As well as considering the complexities of derivative actions and statutory minority remedies, Boyle discusses future directions for minority shareholders’ remedies This book will be of interest to academics and practitioners in company and corporate law, particularly in the UK, USA, France and Germany, as well as throughout the Commonwealth A J B OYLE is Emeritus Professor of Law in the University of London He is General Editor of Gore-Browne on Companies (1972 to date) and original joint author of Boyle and Bird’s Company Law (four editions, 1982–2000) He has published widely in the field of company law Cambridge Studies in Corporate Law Series Editor Professor Barry Rider, University of London Corporate or company law encompasses the law relating to the creation, operation and management of corporations and their relationships with other legal persons Cambridge Studies in Corporate Law is a major new initiative offering an academic platform for discussion of these issues The series is international in its choice of both authors and subjects, and aims to publish the best original scholarship on topics ranging from labour law to financial and capital regulation Minority shareholders’ remedies A J Boyle The Pitt Building, Trumpington Street, Cambridge, United Kingdom The Edinburgh Building, Cambridge CB2 2RU, UK 40 West 20th Street, New York, NY 10011-4211, USA 477 Williamstown Road, Port Melbourne, VIC 3207, Australia Ruiz de Alarcón 13, 28014 Madrid, Spain Dock House, The Waterfront, Cape Town 8001, South Africa http://www.cambridge.org © A.J Boyle 2004 First published in printed format 2002 ISBN 0-511-03147-5 eBook (Adobe Reader) ISBN 0-521-79106-5 hardback Contents Preface Tables of cases Table of statutes The rule in Foss v Harbottle page vii ix xvi Shareholder actions by exception to the rule 24 A new derivative action 60 The statutory minority remedies 90 Reforming the statutory remedies 119 Index 140 v Preface It must be admitted that there is already an extensive literature in the form of both monographs and periodical articles on the subject of minority remedies A further attempt to explore this controversial and complex subject is nevertheless warranted not only by the continuing developments in the case law but even more so by the fundamental reforming work of the Law Commission, as further appraised and amplified by the work in progress of the Company Law Review Steering Group To this must be added the impact of the new Civil Procedure Rules and the possible effect of conditional fee agreements The first two chapters explore in turn the Foss v Harbottle rule and the common law actions that the rule itself permits despite its general prohibition against minority suits These topics are explored in the context of their legal history as well as in the light of legal theory and comparative law Consideration is given to the possible reasons for the long neglect of this area by law reformers A further matter requiring attention relates to the problems in terms of both policy and practice posed by the public listed company The most significant reform set out in the Law Commission’s Report on shareholder remedies is a new statutory derivative action to replace its common law equivalent Broadly, this new remedy is based on models provided by existing Commonwealth legislation The Law Commission’s version is, however, somewhat more cautiously conservative than, for example, the well-tested Canadian model The Law Commission’s proposed remedy if not further amended will provide little overall improvement on the common law derivative action in the case of public listed companies It is here that a more effective new remedy is most needed For private companies, the existing minority remedies are largely adequate The last two chapters are devoted to the linked statutory remedies by way of petition on the ground of unfair prejudice and/or for just and equitable winding up A significant development here is the House of Lords’ endeavour to set out a new conceptual framework for the ever expanding case law on unfair prejudice Academic scholarship has also vii viii Preface had a useful part to play in theorising the unfair prejudice remedy The Law Commission’s attempt to frame an expeditious and simplified procedure applicable to owner-managed companies deserves more attention than it has yet received The Company Law Review Steering Group has been much too dismissive of the Law Commission’s work in this respect This study of minority shareholders’ remedies makes two assumptions First of all, it is assumed that the specialised procedures allowing minority shareholders to apply to court in particular statutory contexts (e.g mergers or takeovers or constitutional amendments) lie beyond the scope the present study Secondly, it assumed that the readers of this monograph have a sound understanding of company law in general and directors’ duties in particular 134 Minority shareholders’ remedies disaffected without the need to resort to section 459 proceedings which would involve costly and cumbersome litigation The key qualification in Regulation 119 is that it requires an ordinary resolution before exit rights could be attached to particular shares No particular circumstances for triggering these exit rights are set out It is left to the company to set these out (if required) in the resolution The rights created by the resolution would be exercised by service of notice requiring those on whom the notice is served to purchase the shares of the shareholder wishing to exit.82 The Report notes that there was widespread support for an exit article along the lines proposed A few respondents had reservations One criticism was that providing exit routes might prove economically damaging and lead to the break-up of small businesses at the first sign of disagreement The Report rejects this argument as applied to its carefully qualified proposal Rather than encouraging break-up, Regulation 119 is intended to encourage the parties to make provision for future breakdown in their relations so as to minimise the disruption in the company’s business.83 The Report also dismisses the argument that an exit right enables minority shareholders to exert improper pressure on the basis that the other side could not afford to pay for the shares There is no reason to think that this will give rise to any particular difficulties beyond any other minority remedy.84 A further critique was that the specialised and particular nature of the proposed exit right was unsuitable for inclusion in the general character of Table A The Report responds to this argument by pointing out that it leaves it to the company to decide when the exit rights will apply.85 ‘The article is therefore very versatile and does not suffer from the difficulties to which a standard form pre-emption article would give rise.’86 Circumstances giving rise to exit right In the Consultation Paper,87 the proposed exit right in the articles was confined to companies with less than ten members This could readily be evaded by splitting shareholdings The Report regards the ten-member limit as unnecessary and possibly arbitrary Since the company has to pass 82 83 84 85 86 See Report, para 5.5 and Appendix C, Draft Regulation 19(2) and 19(3) Further models of this right are discussed below See Report, paras 5.7–5.8 Thus pre-emption rights, common in the articles of private companies, were never included in Table A I.e either by passing a special resolution or by modifying Draft Regulation 119 to set out the relevant circumstances 87 See Consultation Paper, para 19.11 See Report, paras 5.6 and 5.9 Reforming the statutory remedies 135 a resolution to bring the article into effect, this is a sufficient restriction on its applicability.88 In the Law Commission’s Report, the view was taken that the remedy should be available both in situations where an unfair prejudice petition might be brought and on ‘no fault’ situations where a right of exit might be desired.89 The solution adopted was not to limit the remedy but to give two examples of very common situations in which shareholders are likely to want to invoke exit rights The two situations are: (a) the removal of a shareholder who is a director from his office as a director of the company; and (b) the death of a shareholder.90 The company is free, in applying draft Regulation 119,91 to specify in the resolution any specified event or events deemed desirable The resolution must also name the shareholder or shareholders to which it applies and the latter must consent to it The resolution must also name those shareholders required to buy the shares at a ‘fair price’ The exit right must be exercised by giving notice to the company and to the named shareholders required to buy the shares.92 To qualify, the shares must have been held when the resolution was passed.93 The notice may not be withdrawn unless all the shareholders named in the resolution agree.94 The method of valuation The resolution must state how the ‘fair price’ is to be calculated Various possible methods of determining this calculation are listed for convenience.95 It is for the company to decide which to adopt, but the resolution is invalid unless it contains a provision as to the meaning of a fair price.96 Those methods listed are: determination by an independent person (acting as an expert valuer and not as an arbitrator or arbiter); a price representing a rateable value;97 in the case of shares which not carry a right to participate in a winding up, a price representing their net asset value as determined by an independent person; in the case of shares which not carry a right to participate in surplus assets in a winding up, a price equal to the capital sum paid for them The company must select what is regarded as the most appropriate basis This must be stated in the resolution 88 90 91 93 94 95 97 89 Report, paras 5.17–5.18 Report, para 5.13 I.e allowing exit to the personal representative 92 Report, Appendix C(2) Report, Appendix C(3) Or be shares acquired in the right of them (e.g bonus shares) See Report, para 5.29 96 Ibid Report, Appendix C, Draft Regulation 119(6) See Report, Appendix C, Draft Regulation 119(7) for the formula for an independent person to determine the rateable value of shares of a particular class 136 Minority shareholders’ remedies ‘Independent person’ The Report98 defines the ‘independent’ person, who is given the task of making the valuation of the shares, as ‘an independent person who appears to have the requisite knowledge and experience’ In the Consultation Paper,99 the definition was ‘an independent accountant’ The Law Commission accepted the argument that the company’s auditor or another accountant may not always be the best person to value the shares It is pointed out that share valuation requires particular skills which not necessarily form part of an accountant’s training or practice There are experienced valuers who are not accountants As regards the company’s auditor, there may well be a conflict of interest between the interests of the exiting shareholder and the ongoing relationship of the auditor to the company.100 The manner of appointment of the independent person is to be provided in the resolution creating the exit rights Provision is made as to recovery of the purchase price after a valuation is made The Report101 rejects the Consultation Paper’s suggestion that the exiting shareholders have the right to wind up the company if the remaining shareholders failed to purchase his or her shares within the timescale provided The Report notes the difficulties such a remedy might create (e.g if only one or two shareholders out of many failed to purchase some of the outgoing shareholders’ shares) It would also allow unjustifiable pressure to be placed on those shareholders Instead, the Report102 concludes that the exiting shareholders could simply invoke the ordinary contractual remedy of specific performance.103 The Report deals with problems caused by certain changes in circumstances which will cause a resolution (creating exit rights) to cease to have effect before the shareholder can invoke the rights created The first circumstance arises where a shareholder (named as buyer in the resolution) ceases to hold the shares which he held when the resolution was passed.104 This is without prejudice of course to any exit notice which has already been served.105 To prevent this provision being abused by the transfer of shares designed to destroy exit rights, draft Regulation 119 provides that directors must refuse to register a transfer which would 98 99 100 101 103 104 105 See Report, para 5.26 and Appendix C, Draft Regulation 119(13) See Report, Appendix C, Draft Regulation 119(5) Report, para 5.26 As to the procedure applicable to the work of the independent person, see Appendix H, Draft Regulation 119(10) 102 Ibid Report, para 5.28; Consultation Paper at 19.8 Report, para 5.28 The Report also rejects the proposal for a provision for the payment of the purchase price by instalments: Report, para 5.30 See Report, para 5.23 and Appendix C, Draft Regulation 119(6) This provision can be excluded in the resolution Report, Appendix C, Draft Regulation 119(16)(a) Reforming the statutory remedies 137 cause the resolution to be ineffective.106 The second circumstance which will cause the resolution to cease to have effect (unless the resolution states otherwise) is when a named shareholder dies The reason for this provision is that it would delay the administration of the estate if there was potential liability to purchase the shares of other named shareholders which remained outstanding The provision is of course without prejudice to any exit notice already served before the death In addition, if it is the death of a shareholder which triggers the exercise of the exit right by his or her successor, the resolution is to continue so far as that event is concerned.107 Appraisal of the exit remedy The ‘exit’ remedy as amended by the Law Commission’s Report on shareholder remedies appears to be a well-thought-out and crafted ‘self help’ measure It carefully balances the various opposed interests involved It is obviously true that only many years of experience of its practical working will enable a fuller picture to be drawn of its utility, fairness and robustness It is strange that the Company Law Review Steering Group has made adverse comment on this aspect of the Law Commission’s work,108 even though in terms of the affairs of the mass of small private companies the proposed exit remedy, if implemented in a reformed Table A, may prove much the most important change made in minority shareholders’ remedies It is far more attractive than litigation In view of the debatable quality and clarity of the Steering Group’s attempts to revise and ‘improve’ the Law Commission’s work, it is perhaps fortunate that this omission has occurred Other ‘additions’ to Table A rejected The Law Commission proposed in its Consultation Paper109 a draft regulation110 (for inclusion in Table A) providing for arbitration of disputes between shareholders and the company This would apply to any type or size of company but would be confined to disputes that could be litigated It also provided that the arbitration proceedings would be suspended if parties sought instead to use an alternative dispute resolution 106 107 108 109 110 Report, Appendix C, Draft Regulation 119(20) Report, para 5.24 See Report, Appendix C, Draft Regulation 119(16)(b) See Developing the Framework and Completing the Framework See p 139 below The DTI’s Consultation Paper on Shareholder Remedies (November 1998) 8.9 supports the exit article Consultation Paper, para 19.11 See Consultation Paper, Appendix H, Draft Regulation 120 138 Minority shareholders’ remedies procedure (e.g mediation).111 The Law Commission’s Report was not impressed by the need to include an arbitration article in Table A as opposed to an article which private companies might draft for themselves Although a small majority of respondents favoured an arbitration article in Table A, the Law Commission was more impressed by the arguments of a majority of practising lawyers as to the problems that might occur.112 Among the more persuasive of these arguments were: (a) the likely disputes as to whether the complaints of the shareholders were not an appropriate subject of legal proceedings; and (b) that the interests of other shareholders might be affected but it is not clear how they were to be represented in arbitration proceedings It may be added that the practical utility of arbitration in the case of public companies is seriously open to question The Law Commission113 concluded that the difficulties of the proposal outweighed the benefits It was of course open to the parties to shareholder/company disputes to resort to arbitration or other alternative dispute resolution procedures The Law Commission114 also rejected a draft regulation proposed in its Consultation Paper115 to provide in Table A for a valuation procedure This was intended to meet the situation where all the shareholders in a company agree that one or more of them should sell their shares to the rest but could not agree on the price This valuation procedure was designed to avoid an unnecessary petition under section 459 The Law Commission, however, accepted the criticisms of a number of respondents as to how such a Table A regulation could work in practice The Law Commission were concerned that the parties should not be bound by a valuation procedure at too early a stage since this might discourage them from entering into negotiations at all If, on the other hand, the regulation was only to apply when the parties have reached an effective agreement, this requires that they must either have agreed on the price or on a method of fixing the price In the form proposed in the Consultation Paper,116 the draft regulation would have had the effect of imposing a pro rata basis of valuation This basis of valuation might not meet the needs or intentions of the parties as to the basis on which the third party valuer should determine the price The arguments of the Law Commission rejecting a draft regulation on arbitration and a draft regulation on valuation 111 113 114 115 116 112 Report, para 5.36 See Consultation Paper, paras 19.13–19.14 Report, para 5.30 The DTI’s Consultation Paper on Shareholder Remedies, para 12.8 accepts the Law Commission’s view Report, paras 5.39–5.48 Consultation Paper, paras 19.16–19.17 See Appendix H, Draft Regulation 121 See Consultation Paper, para 19.16 and Appendix H, Draft Regulation 121(2) Reforming the statutory remedies 139 procedure (as candidates for a new Table A) seem well made and based on sound practical considerations The Company Law Review Steering Group takes, here again, a dismissively negative stance towards the Law Commission’s proposed ‘exit article’.117 The Committee states that ‘the proposed article was carefully considered in our working group on small firms and in the group on shareholders’ rights’ The ‘clear conclusion’ reached by these groups was that the exit article would not be used in practice because on commercial grounds it would not be incorporated in company constitutions by wellinformed founders and was inherently undesirable on the grounds of lack of flexibility ‘It was impossible to prescribe in advance, and for the full diversity of companies, what would be a fair exit regime For ill-informed founders it would be a trap.’ All this ignores the fact the Law Commission received widespread support for an exit article The reservations of a ‘few respondents’ were taken into account in the Law Commission’s revised version of the exit article The dismissive opinions quoted by the Steering Group would seem to require much fuller elaboration on the public record if they are to form the basis of inaction by the DTI An exit article is not forced on a company wishing to exclude it, and when operative can only be invoked on the basis of a majority resolution The assertions of the working groups must beg some questions since the Law Commission’s article will never be tested in practice Once again, the Steering Group has no positive proposal to make to deal with the obvious problems that the Law Commission was seeking to solve 117 See Developing the Framework, para 4.103 Index agency, costs, 114 directors, 54 applications for leave, abusive applications, 65 alternative remedies, 80–1 conflict of interest, 75 evidence, derivative actions, 33, 34, 71 flexible discretion, 72–3 good faith, 74–5 grant of leave, 65, 67, 72–4 independent organ, 79–80, 81, 82, 84 interests of company, 75 notice, 71 powers of court, 72 ratification, 76–8 relevant issues, 72–4 resolutions, 78–9, 82 right of intervention, 86–7 specific matters, 74–5 statutory derivative actions, 65, 71–81 winding up, 129–31 articles of association, see also contract of association alteration/amendment, bona fide, 21, 56 invalid, 56 special resolution, 56 breach, informal departure distinguished, 21 liquidated sums, 14 mere breach, 18, 21, 51, 56 deemed covenants, 14, 16 dispute resolution, 22 enforcement, 15 Hickman principle, 16, 17 implied terms, 15 outsider rights, 15–19 personal rights, 51–2 pre-emption rights, 52, 105 private companies, 57 140 rectification, 15 resolutions, 55–6 rights inter se, 16 share transfer, 57 shareholder-directors, 17 shareholders’ rights, 15–19, 20, 102 unfair prejudice remedy, 97 auditors, share valuation, 22, 102 special auditors, 49 Australia, derivative actions, 13, 30, 31, 32, 74 illegality, 53 independent experts, 84 board of directors, breach of duty, 65 corporate litigation, 21 independent majority, 28, 29 negligence, 66 public listed companies, 77 breach of contract, damages, 59 shareholders’ agreements, 54, 59 third parties, 62 breach of duty, board of directors, 65 contract of association, 17 damages, 24 default, 67 definition, 67 derivative actions, 24, 62 direct actions, 69 equitable fraud, 21, 26 fiduciary, see fiduciary duty fraud on a minority, fraudulent character, 26–7 mere breach, 26 minority actions, ‘no conflict’, 21, 26, 66 non-ratifiable acts, 26, 77, 78 Index skill and care, 63, 65, 66, 67, 78 statutory derivative actions, 62, 63, 65, 66–7 third parties, 62–3 unfair prejudice remedy, 100 breach of trust, non-ratifiable acts, 21 Cadbury Report, 75, 80, 111 Canada, derivative actions, 11, 13, 68, 74 double derivative actions, 85 ratification, 78 capital payments due, conditional fee agreements, 59 liquidated sums, 50 liquidation, 52 case management, derivative actions, 9, 35 statutory derivative actions, 71–2 Civil Procedure Rules, derivative actions, 32–6, 60 unfair prejudice remedy, 110 class rights, infringement, 21, 25 unfair prejudice remedy, 56, 102 variation/abrogation, 56, 102 Cohen Report (1945), Foss v Harbottle rule, 11, 90 statutory remedies, 90 common law, Foss v Harbottle exceptions, 4–5, 6, 7, 23 ratification, 76, 77 common law derivative actions, abolition proposed, 68, 61 company’s rights, 35, 37 comparative law, 11 compromise procedure, 9, 31 fiduciary duty, 67 fraud on a minority, 63, 64 illegality, 68 independent organ, 79 Law Commission, 9, 23 public listed companies, 12 scope, 24 third parties, 62 Commonwealth, derivative actions, 10, 12, 23, 61, 62, 68 pro rata recovery, 85 ratification, 78 Company Law Review Steering Group, 131, 137, 139 compensation, expropriation, shares, 56 141 compromise, common law derivative actions, 9, 31 statutory derivative actions, 82 conditional fee agreements, capital payments due, 59 derivative actions, 37, 83 direct actions, 83 unfair prejudice remedy, 83 unpaid dividends, 59 conflict of interest, applications for leave, 75 ‘no conflict’ rule, 21, 26, 66 plaintiffs, 82 statutory derivative actions, 66 contract of association, see also articles of association breach of duty, 17 Foss v Harbottle rule, 1, 13–14, 17, 18 Law Commission, 18 not defeasible, 14 outsider rights, 13 personal rights, 51 shareholder remedies, 13–14 special character, 14–15 contracts, breach, see breach of contract contractual planning, 20, 22 economic exchange, 20 relational contracts, 20, 22 costs, Germany, 48–9 security for costs, 35 costs indemnity orders, derivative actions, 9, 34, 35, 36, 59 statutory derivative actions, 82–4 trusts compared, 36 Wallersteiner orders, 32, 59 damages, breach of contract, 59 breach of duty, 24 derivative actions, 24, 35, 68 France, 46 Germany, 48 de facto control, public listed companies, 29, 30, 33, 34, 63, 66, 77, 81 wrongdoer control, 28, 29, 30, 74, 81, 100 declarations, direct actions, 50, 59 illegality, 69 personal actions, 69 special majorities exception, 69 ultra vires transactions, 24, 69 142 Index Department of Trade and Industry (DTI), Foss v Harbottle rule, 1, 11–12, 52 investigations, 13, 112 personal rights, 55 public listed companies, 13 statutory derivative actions, 60 unfair prejudice remedy, 112, 132 winding up, 129, 131 derivative actions, applications for leave, 33, 34, 61 Australia, 13, 30, 31, 32, 74 breach of duty, 24, 62 Canada, 11, 13, 68, 74 case management, 9, 35 Civil Procedure Rules, 32–6, 60 claim forms, 33 common law, see common law derivative actions Commonwealth, 10, 12, 23, 61, 62, 68 company property, recovery, 35 compromise procedure, 9, 31 conditional fee agreements, 37, 83 costs indemnity orders, 9, 34, 35, 36, 59 cross-applications, security for costs, 35 damages, 24, 35, 68 discovery, evidence, admission, applications for leave, 33, 34, 71 difficulties, former shareholders, 36, 70 France, 25, 45–7, 62 fraud, see fraud on a minority funding, 9, 10, 36–7 Germany, 25, 47–9, 62 good faith, 36 indemnity orders, injunctions, 70 Law Commission, 9–10, 23, 35 law reform, see statutory derivative actions legal aid, 37 locus standi, 8, 9, 30, 32, 33, 36 misappropriation, corporate assets, 26 New Zealand, 74 permission to continue, 33–4 plaintiffs, 70 private companies, 24 pro rata recovery, 84–5 procedural reform, 9, 32–6 procedural shambles, 9, 32 proceeds, 83 public listed companies, 12–13, 24, 25, 27, 29, 101, 102 secret profits, 26, 27 security for costs, 35 strike suits, 25, 41, 84 threshold shareholding, see percentage shareholding ultra vires transactions, 24, 53, 68 United States, 13, 25, 38–45, 62 Wallersteiner orders, 32, 59 wrongdoing, see wrongdoer control direct actions, abuse of powers, 55–8 breach of duty, 69 categories, 51–8 conditional fee agreements, 83 constitution upheld, 53–5 corporate legality, 53–5 declarations, 50, 59 due process, 55, 56, 56 fiduciary duty, 56–7 funding, 59 injunctions, 50, 53, 59 personal/individual rights, 51–3, 69 procedural form, 58 shareholders’ rights, 25, 49–59 terminology, 49–50 United States, 69 directors, agency, 54 benefits, expense of company, 27 de facto, 64 definition, 63–4 shadow directors, 64 shareholding, see shareholder-directors ultra vires, see ultra vires transactions wrongdoing, see wrongdoer control directors’ duties, breach, see breach of duty fiduciary, see fiduciary duty full range, 66–7 Germany, 12 Law Commission, 12 share allotment, 57 skill and care, 63, 65, 66, 67, 78 discovery, derivative actions, pre-action discovery, dispute resolution, alternative dispute resolution, 137–8 articles of association, 22 internal forum, 20 majority rule, 22 partnerships, 2–3 dividends, declared but unpaid, 50, 59 personal rights, 51–2 due process, direct actions, 55, 56, 56 Index employees, statutory derivative actions, 64–6 equitable fraud, breach of duty, 21, 26 equity, good faith, 56, 99 partnerships, 2, relief, bona fide, 56 representative actions, 4, winding up, see just and equitable winding up European law, European Company Statute, 11, 12, 61 Fifth Company Law Directive, 11, 12, 61 evidence, derivative actions, admission, applications for leave, 33, 34, 71 difficulties, fiduciary duty, common law derivative actions, 67 direct actions, 56–7 statutory derivative actions, 65, 66, 67 unfair prejudice remedy, 98, 100 firm, role of firm, 114 Foss v Harbottle rule, arguments/grounds, 5–6 bypassed by statutory remedies, 22–3 clarity lacking, 8, 21, 23 Cohen Report (1945), 11, 90 contract of association, 1, 13–14, 17, 18 Department of Trade and Industry (DTI), 1, 11–12, 52 derivative actions, see derivative actions exceptions, 4–5, 6, 7, 23, 24–59, 68 fifth exception, 31–2 French law compared, 45 German law compared, 48 illegality, 50, 53 incorporation, introduction, 1–2 Jenkins Report (1962), 11 judicial analysis, 5–19 judicial policies, 6–7, 23, 74 justice of case, 27, 28, 31 Law Commission, 10, 11–12, 19, 52, 61 law reform, 1, 10–12 majority rule, 4, 5–6 origins, 2–5 partnerships, 2, 3, 5, personal/individual rights, 51, 52 proper plaintiff, 4, 5, 6, ratification, 4, 5, 7, 17, 21, 25 143 robust approach, 30 shareholders’ agreements, 54 significance, special majorities, 55, 68, 69 statutory derivative actions, 80 theorising, 20–2 ultra vires transactions, 50, 53 unfair prejudice remedy, 22–3, 102 United States, 38–40 France, action social exerc´ee ut singuli, 46 damages, 46 derivative actions, 25, 45–7, 62 percentage of capital solution, 25, 45–7 shareholder remedies, 11 shareholders’ meetings, 47 soci´et´e anonyme, 45, 49 special auditors, 49 fraud on a minority, see also derivative actions breach of duty, common law derivative actions, 63, 64 exception, 25–6 flexibility, 30 fraudulent character, 26–7 fraudulent transactions, 30 legal uncertainty, 34 locus standi, 30 majority shareholders, 63 personal rights, 63 public listed companies, 27, 44 robust approach, 30 serious fraud, 44 strike suits, 25 wrongdoer control, 6, 7, 26, 27–9, 64 funding, derivative actions, 9, 10, 36–7 direct actions, 59 Germany, costs, 48–9 damages, 48 derivative actions, 25, 47–9, 62 directors’ duties, 12 percentage of capital solution, 25, 45, 47–9 shareholder remedies, 11 special auditors, 49 special representatives, 48 good faith, applications for leave, 74–5 articles of association, alteration/ amendment, 21, 56 144 Index good faith (cont.) derivative actions, 36 equity, principles, 99 relief, 56 resolutions, 68 unfair prejudice remedy, 95, 97, 99 United States, 41, 42 groups of companies, statutory derivative actions, 66, 85, 86 illegality, Australia, 53 common law derivative actions, 68 declarations, 69 Foss v Harbottle rule, 50, 53 injunctions, 69 incorporation, Foss v Harbottle rule, proper plaintiff, 4, 5, trading companies, independent experts, 84 independent majority, 28, 29 independent organ, applications for leave, 79–80, 81, 82 common law derivative actions, 79 public listed companies, 80, 82 independent person, 136–7 individual actions, 50 individual rights, 51–3 injunctions, derivative actions, 70 direct actions, 50, 53, 59 illegality, 69 personal actions, 69 special majorities exception, 69 ultra vires transactions, 24, 53, 69 investigations, Department of Trade and Industry (DTI), 13, 112 Jenkins Report (1962), Foss v Harbottle rule, 11 statutory remedies, 107 unfair prejudice remedy, 90–1 joint stock companies, ownership/management, shares, unincorporated, 2, 38 judicial review, locus standi, just and equitable winding up, alternative remedy, 103 bar, offer to buy, 103–5 breakdown of mutual confidence, 93, 98 choice of remedy, 102–3 Cohen Report (1945), 90 deadlock, 93, 99 equitable considerations, 92–3 expulsion from management, 92–3 just and equitable defined, 91–2 nature and scope, 91–4 origins, 11 petitions, 90 quasi-partnership companies, 91, 93 unfairness, 97, 99 Law Commission, contract of association, 18 derivative actions, see statutory derivative actions directors’ duties, 12 failure to pursue proceedings, 86–7 Foss v Harbottle rule, 10, 11–12, 19, 52, 61 independent experts, 84 judicial control, 10, 61 multiple derivative actions, 85–6 personal actions, 18, 49, 68–70 personal rights, 18, 63 pro rata recovery, 84–5 ratification, 76–8 remedial orders, 128–31 remedial powers rejected, 84–7 representative actions, 69 shareholder remedies, 9–10, 11–12, 13, 18–19, 23, 35, 60–89 unfair prejudice remedy, 119–28, 131–2 legal aid, derivative actions, 37 legitimate expectations, 111–12 limitation, unfair prejudice remedy, 131–2 liquidated sums, breach of articles, 14 capital payments due, 50 declared dividend unpaid, 50 liquidation, capital payments due, 52 locus standi, derivative actions, 8, 9, 30, 32, 33, 36 former shareholders, 36, 70 fraud on a minority, 30 in limine, judicial review, minority shareholders, unfair prejudice remedy, 110–12 majority rule, dispute resolution, 22 Foss v Harbottle rule, 4, 5–6 ratification, see ratification managers, statutory derivative actions, 64, 65 Index membership contract, see contract of association minority shareholders, derivative actions, see derivative actions fraud, see fraud on a minority locus standi, majority within, 28–9, 79 oppression, 90, 95 pre-emption rights, 22 public listed companies, 12–13 relative rights, 22 unfavoured litigants, 7–10 misconduct, not ratifiable, ratification, 4, 5, negligence, board of directors, 66 unfair prejudice remedy, 100–1 New Zealand, derivative actions, 74 multiple derivative actions, 86 non-executive directors, 80 officers, statutory derivative actions, 64–6 oppression, minority shareholders, 90, 95 outsider rights, articles of association, 15–19, 20 contract of association, 13 partnerships, dissolution, 2, equity, 2, Foss v Harbottle rule, 2, 3, 5, internal disputes, 2–3 ratification, written resolutions, 22 percentage shareholding, France, 25, 45–7 Germany, 25, 45, 47–9 threshold test, 25, 74 personal actions, see also direct actions declarations, 69 injunctions, 69 Law Commission, 18, 49, 68–70 shareholder remedies, 18, 19, 49–50, 68–70 personal rights, see also shareholders’ rights articles of association, 51–2 contract of association, 51 Department of Trade and Industry (DTI), 55 direct actions, 51–3, 69 145 dividends, 51–2 fraud on a minority, 63 Law Commission, 18, 63 register of members, 51 shareholders’ meetings, 52 terminology, 50 voting, 51, 52 plaintiffs, see also proper plaintiff conflict of interest, 82 derivative actions, 70 substitution, 82 powers of court, ancillary powers, 81–4 applications for leave, 72 indemnity for costs, see costs indemnity orders independent experts, 84 plaintiffs, substitution, 82 remedial orders, 128–31 shareholders’ meetings, 5, 8, 28, 74, 77, 81–2 statutory derivative actions, 72, 81–4 statutory remedies, 107–9 pre-emption rights, articles of association, 52, 105 minority shareholders, 22 private companies, articles of association, 57 choice of remedies, 102–3 derivative actions, 24 majority within a minority, 79 share transfer, 57 shareholder remedies, 13 shareholders’ agreements, 54 unfair prejudice remedy, 91, 100, 108, 111 wrongdoer control, 28–9, 85 proper plaintiff, exception, 25–6 Foss v Harbottle rule, 4, 5, 6, incorporation, 4, 5, United States, 39 public listed companies, board of directors, 77 corporate controller, 64 de facto control, 29, 30, 33, 34, 63, 66, 77, 81 Department of Trade and Industry (DTI), 13 derivative actions, 12–13, 24, 25, 27, 29, 101, 102 dispersed shareholdings, 27, 66, 78 financial/information barriers, 83 fraud on a minority, 27, 44 146 Index public listed companies (cont.) holding companies, 86 independent organ, 80, 82 interests, 12, 13 legitimate expectations, 111 minority shareholders, 12–13 self-regulation, 13 shareholders’ meetings, 8, 22, 28, 35, 77, 81–2, 84 statutory derivative actions, 102 unfair prejudice remedy, 101, 102 wrongdoer control, 9, 27, 29, 30, 35, 64, 101 quasi-partnership companies, just and equitable winding up, 91, 93 legitimate expectations, 111 unfair prejudice remedy, 95, 97, 110, 111 ratification, Canada, 78 common law, 76, 77 Commonwealth, 78 Foss v Harbottle rule, 4, 5, 7, 17, 21, 25 Law Commission, 76–8 misconduct, 4, 5, 7, 25 non-ratifiable acts, 17, 21, 25, 26, 67, 77, 78 partnerships, ratifiable acts, 4, 5, 7, 17, 21–2, 76, 77 United States, 39 representative actions, derivative actions distinguished, 69 equity, 4, Law Commission, 69 procedural forms, 58 torts, 58 resolutions, see also shareholders’ meetings applications for leave, 78–9, 82 articles of association, 55–6 extraordinary, 55 good faith, 68 not to pursue action, 78–9 special, 55, 56 “tricky notice” cases, 56 right of exit, appraisal of remedy, 137 circumstances giving rise, 134–5 share valuation, see share valuation statutory remedies, 125, 133–9 Table A, 137–9 Scotland, statutory derivative actions, 87 secret profits, derivative actions, 26, 27 security for costs, derivative actions, 35 share allotment, directors’ duties, 57 share transfer, articles of association, 57 buy-out, bar to winding up, 103–5 no fault situation, 121 offer to buy, 103–7 reasonable offer, 106–7 unfair prejudice remedy, 23, 102, 105–7, 108 valuation, see share valuation expropriation, compensation, 56 operation of law, 112 pre-emption, see pre-emption rights private companies, 57 refusal, collateral purpose, 57 share valuation, auditors, 22, 102 buy-outs, 102, 104, 105, 106, 108 discounted basis, 106, 108, 120 fair value, 119–20, 135 independent person, 136–7 method, 135 pro rata, 106, 108, 120 Table A, 138–9 shareholder-directors, articles of association, 17 shareholders, former shareholders, 36, 70 institutional, 73, 75 percentage test, see percentage shareholding public listed companies, 12–13, 27, 66, 78 selling out, 82 shareholders’ agreements, breach of contract, 54, 59 enforcement, 14 Foss v Harbottle rule, 54 private companies, 54 unfair prejudice remedy, 97 shareholders’ meetings, conduct, 22, 52 expense, 35, 82, 84 France, 47 internal irregularities, 52 personal rights, 52 powers of court, 5, 8, 28, 74, 77, 81–2 public listed companies, 8, 22, 28, 35, 77, 81–2, 84 resolutions, see resolutions Index share allotment, 57 voting, 51, 52, 78, 79 wrongdoer control, 28, 35, 81–2 shareholders’ remedies, contract of association, 13–14 France, 11 Germany, 11 Law Commission, 9–10, 11–12, 13, 18–19, 35, 60–89 personal actions, 18, 19, 49–50, 68–70 private companies, 13 shareholders’ rights, articles of association, 15–19, 20, 102 classes, see class rights direct actions, 25, 49–59 internal irregularities, 21, 51 personal, see personal rights pre-emption, 22, 52 unfair prejudice remedy, 95–6 United States, 40 shares, joint stock companies, special auditors, 49 special majorities exception, 55, 68, 69 statutory derivative actions, abusive applications, 65 ancillary powers, 81–4 applications for leave, 65, 71–81 breach of duty, 62, 63, 65, 66–7 case management, 71–2 compromise, 82 conflict of interest, 66 costs indemnity orders, 82–4 Department of Trade and Industry (DTI), 60 discontinuance, 82 draft Bill, 60 draft rules, 60, 70, 71 employees, 64–6 fiduciary duty, 65, 66, 67 Foss v Harbottle rule, 80 grant of leave, 65, 67, 72–4 groups of companies, 66, 85, 86 guiding principles, 61 implementation, 70–1 introduction, 60–2 Law Commission, 9–10, 23, 35, 60–89 law reform, 10, 12, 23, 37, 60–89 majority shareholders, 63–4 managers, 64, 65 multiple actions, 66, 85–6 notice to company, 71 officers, 64–6 proposed scope, 62–81 public listed companies, 102 147 Scotland, 87 skill and care, 63, 65, 66, 67, 78 statutory remedies, alternative approach, 122–4 civil proceedings authorised, 107–8, 109 fault/no fault, 121, 125, 133 Jenkins Report (1962), 107 law reform, 119–39 minority shareholders, 90–118 powers of court, 107–9 right of exit, 125, 133–9 unfair prejudice, see unfair prejudice remedy winding up, see just and equitable winding up strike suits, 25, 41, 84 Table A, right of exit, 137–9 torts, representative actions, 58 third parties, 62 ultra vires transactions, declarations, 24, 69 derivative actions, 24, 53, 68 Foss v Harbottle rule, 50, 53 injunctions, 24, 53, 69 United States, 39 unfair prejudice remedy, articles of association, 97 availability, 22–3 breach of duty, 100 choice of remedy, 102–3 Civil Procedure Rules, 110 class rights, 56, 102 clean hands, 103 concept, 94–6 conditional fee agreements, 83 Department of Trade and Industry (DTI), 112, 132 equitable considerations, 100 fiduciary duty, 98, 100 Foss v Harbottle rule, 22–3, 102 good faith, 95, 97, 99 gross misconduct, 119 grounds, 94 House of Lords cases, 96–100 Jenkins Report (1962), 90–1 Law Commission, 119–28, 131–2 limitation, 131–2 locus standi, 110–12 negligence, 100–1 origin, 11 outlook for reform, 132–3 prejudicial conduct, 96 148 Index unfair prejudice remedy (cont.) presumptions, 122–5 private companies, 91, 100, 108, 111 pro rata recovery, 85 procedural changes, 132 procedure, 109–10 profit-sharing agreements, 96 public listed companies, 101, 102 quasi-partnership companies, 95, 97, 110, 111 reasonable bystander test, 95 shareholders’ agreements, 97 shareholders’ rights, 95–6 shares, buy-out, 23, 102, 108 offer to buy, 105–7 smaller companies, 119–20 theorising unfair prejudice, 112–18 United States, 113 varied applications, 100–2 wrongdoer control, 101 United States, abuse of derivative suits, 41–3 American Law Institute, 43–4 business judgment rule, 41, 42 demand, body of shareholders, 38, 45 Delaware rule, 42–3, 44 directors, 38–43, 45 excused, 39, 40, 42, 45 requirement, 38, 39, 40–1 wrongful refusal, 40 derivative actions, 13, 25, 38–45, 62 direct actions, 69 Foss v Harbottle rule, 38–40 fraudulent conduct, 39 general corporation laws, 38 good faith, 41, 42 judicial review, 42, 43, 44 multiple derivative actions, 85 out-of-court settlements, 41 proper plaintiff, 39 public listed corporations, 41 ratification, 39 security for expenses, 41 shareholders’ rights, 40 special litigation committees, 41, 42, 43, 44 strike suits, 25, 41 two-step test, 42 ultra vires transactions, 39 unfair prejudice remedy, 113 winding up, see also just and equitable winding up applications for leave, 129–31 Department of Trade and Industry (DTI), 129, 131 remedial orders, 128–31 Woolf Report (1996), 33, 35 wrongdoer control, Court of Appeal guidance, 29–30 de facto control, 28, 29, 30, 74, 81, 100 de jure control, 27, 28, 31 fraud on a minority, 6, 7, 26, 27–9, 64 legal uncertainty, 34 private companies, 28–9, 85 Prudential case, 27–8, 29–32, 74 public listed companies, 9, 27, 29, 30, 35, 64, 101 shareholders’ meetings, 28, 35, 81–2 unfair prejudice remedy, 101 ...This page intentionally left blank Minority Shareholders Remedies A J Boyle assesses the current state of English company law on minority shareholders remedies from historical, theoretical... in this respect This study of minority shareholders remedies makes two assumptions First of all, it is assumed that the specialised procedures allowing minority shareholders to apply to court... pp 51–8 below See Chapter 2, p 27 below 8 Minority shareholders remedies not with a rebuke for troubling the court.’31 This discounts the minority shareholders undeniable statutory and contractual